Crackling tension among European leaders in Davos is set to spill over into an
equally charged EU summit as a Greek default looms, says Louise Armitstead.

Filing into Davos's grand conference hall on Thursday afternoon, delegates to the World Economic Forum (WEF) were accompanied by some loud, mournful music and a slideshow on the big screens above.

On top of the pretty scenes from Europe, the words jarred: "Retail sales down; construction rate down; under 25s unemployment: staggering". Under a banner proclaiming "27 EU countries, 17 eurozone members", flashed: "Decision-making cumbersome" and "Leaders act in the national interest". Questions followed: "Greater fiscal union? Political union? More austerity – but will it kill growth?" The slides concluded: "Time to rethink".

One delegate remarked: "They need to have those slides playing constantly in Brussels on Monday, it would keep their mind on the job."

On Monday the 27 leaders of the European Union converge for yet another summit to save the euro. Despite the advancing severity of the debt crisis – with ratings agency Fitch on Friday night downgrading the credit ratings of Italy, Spain, Slovenia, Belgium and Cyprus – few politicians or business leaders reckon much will be resolved. For many, the frustration is not just that leaders can't agree – they can't even produce a strategy to agree on.

Despite Germany's 11th-hour attempt to press Greece to give up sovereign control over tax and spending decisions this weekend, they appear wilfully to ignore the real conundrums and plump instead for measures, such as the Financial Transactions Tax (FTT) that are peripheral at best.

Even in the relaxed surrounds of the Alps, tensions were high in the run-up to this most crucial of summits.

David Cameron ensured his popularity with eurozone leaders was truly merde when he said Angela Merkel and Nicolas Sarkozy's plans to introduce an FTT was "quite simply madness".

He said he wasn't against the single currency in principle, but said in order for one to work, the eurozone needed economic integration, flexibility to deal with shocks, fiscal transfers, collective debt issuance and a strong central bank. "Currently it's not that the eurozone doesn't have all of these, it's that it doesn't really have any of these," he goaded.

George Soros, the veteran investor, said in Davos he was genuinely baffled: "I am not sure whether the authorities have deliberately prolonged the crisis atmosphere in order to maintain the pressure on [the sinner states] or if they have been driven to their course of action by divergent views which they could not reconcile in any other way."

The divergent views are certainly on show. Also, in Davos, Merkel made a passionate plea for greater integration. "Do we dare more Europe? Are we ready to be more European? Yes, we are ready," she said.

But at the same time she made it crystal clear she opposed all calls, whether from the International Monetary Fund (IMF) or America, for Germany to stump up more cash. "Germany is strong and we wish to stand up for the euro," Merkel told delegates. But Germany would not "promise something we will not be able to fulfil" or pledge money that "if the markets really attack us we won't be able to deliver… or will leave us with an open flank".

Delegates said privately this was a defenceless stance. One high profile investor said: "As part of the euro, Germany has had a decade of being artificially competitive. The country has gained at the expense of others – including the UK – and it's now time they put their hands in their pockets and paid out instead."

In contrast to almost everyone's pleas for urgency, Merkel asked for patience from markets and business leaders: "Things do take a very long time… please take the long drawn-out process with a degree of acceptance." She added that the weaknesses "arose over years – so they can't be overcome at one fell swoop".

Meanwhile, as leaders dither, the crisis is deepening all the time. With Greece threatening a full-scale default in six weeks, time is one thing Merkel no longer has.

Worse, the real economy is being punished. As Cameron pointed out: "More than half of EU member states are now less competitive than they were this time last year while five EU member states are now less competitive than even sclerotic Iran."

Helle Thorning-Schmidt, prime minister of Denmark, said: "People will accept austerity if you talk of jobs and growth, too."

Soaring jobless rates across Europe, particularly in Spain and Italy, have prompted reaction ahead of the summit.

According to the draft treaty, top of the agenda is: "Stimulating employment, especially for youth." The document admits 23m people are unemployed in the eurozone and "concrete action" to overcome the "skills mismatch" and "geographic mismatch" is desperately needed. In the same vein, "completing the single market" is the second item on the draft agenda, with members asked to reach "agreement on standardisation, on energy efficiency and on the simplification of accounting requirements by the end of June 2012". The third point in the draft is "boosting the finances of SMEs".

But as Cameron and George Osborne, the Chancellor, have found in Britain, actually boosting lending is more slippery. In this area, it is the European Central Bank (ECB) that has already done the most work through its long-term refinancing operation (LTRO) of unleashing unlimited cheap loans to European banks for up to three years.

On Friday, Mario Draghi, governor of the ECB, told a session in Davos the action had averted another banking crisis. He said: "So we know for sure we have avoided a major, major credit crunch – a major funding crisis."

European leaders, particularly Sarkozy who faces an election in April, are desperate to be able to say the same on Monday, or in the weeks that follow.

Their biggest hurdle is – still – the Big Fat Greek debt problem. Greece has to repay €14.5bn (£12.1bn) in March, for which it needs the next tranche of its second €130bn bail-out money. Merkel has insisted the cash won't be released until Greece's private creditors agree to take a haircut of at least 50pc. But, as with all things European, it's not a question of Greece talking to its banks; Athens can't make a deal without all 17 eurozone members plus its troika masters – the EU, IMF and ECB – saying so, too.

The tortuous talks continued over this weekend. A Greek finance ministry official close to the talks reported "great progress concerning technical and legal matters" but underlined there "is still a lot of work left to do".

Meanwhile, the cries are going out for Germany to relax its stance on the Greece's private creditors – not least because Fitch, among others, has warned that the deal is likely to constitute a default anyway. According to Soros, Germany "insisting on private sector participation" has merely "further destabilised the situation". He added: "Germany is acting as the taskmaster imposing tough fiscal discipline. This will generate both economic and political tension that could destroy the European Union."

But despite the complications, without a resolution for Greece, everything else will look insubstantive.

Raoul Ruparel, of Open Europe, said: "If there is no agreement on the Greek restructuring, this summit will be little more than a sideshow."

Even so, leaders are expected to opt for the low-hanging fruit and agree their new European Treaty, the so-called fiscal pact. The agreement – to introduce debt caps and strict budget rules – is almost in place. Britain has already vetoed the plans, so it has already been reduced to an intergovernmental agreement, though it's not clear how many of the remaining 26 will sign it.

The final talks have been caught on the influence non-eurozone members will have in terms of attending meetings and making decisions. Sweden, Poland and the Czech Republic are threatening not to sign without full influence.

But a compromise solution has emerged whereby they agree to the fiscal rules and get to attend the meetings.

The pact is likely to be signed – though it could still be subject to Irish and Czech referendums.

A similar compromise has emerged this week over the European Stability Mechanism (ESM) treaty. Leaders have agreed to bring forward the start date of the permanent bail-out fund to June and have proposed it will work alongside the current "big bazooka", the European Financial Stability Facility (EFSF).

However, the deal hasn't been sealed because of objections by some members, in particular Finland, to plans to allow funds to be disbursed by a qualified voting majority (QMV) rather than a unanimous vote. On Friday, Finland, which has argued it will effectively lose its veto of bail-outs, said it was willing to accept QMV for disbursements if a unanimous vote was still required to boost the size of the ESM. A deal would be a significant step forward.

Germany is another stumbling block. It's not clear if Merkel will allow the funds to run in parallel, and if she does she is likely to demand agreement both of the fiscal pact and the Greek creditor issue sorted first. In reality, the ESM deal is likely to be put on hold until the March summit.

At Davos, Cameron said the leaders' priorities were simple: sort Greece, recapitalise the banks; create a proper firewall and unleash more powers for the ECB.

Thorning-Schmidt said of the EU leaders' summit on Monday: "I can assure you and the rest of the world we will do everything we can to restore Europe and get it back on track and restore discipline."